AUDIT OF CORPORATE

GOVERNANCE PRACTICES

“Corporate governance is concerned with holding the balance

between economic and social goals and between individual
and communal goals. The governance framework is there to
encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim
is to align as nearly as possible the interests of individuals,
corporations and society.”

Sir Adrian Cadbury, UK, Commission Report: Corporate Governance 1992

Publication of the Regional Training Institute, Mumbai

[Indian Audit & Accounts Department]
Knowledge Partner Verita Management Advisors Pvt. Ltd

February 2014

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 Index

1. About the Regional Training Institute

2. Preface
3. Foreword
4. Expert Point of View
5. Overview
6. Corporate Governance Emerging Regulatory Landscape
7. Perception & Challenges
8. Audit of Corporate Governance System
9. Checklist
10. References

11. Acknowledgement

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 About the Regional Training Institute (RTI), Mumbai

The Regional Training Institute (RTI), Mumbai is one of the nine RTI of the Indian Audit &
Accounts Department situated through-out the country. The RTI caters to the training
requirements of 15 user offices of Indian Audit & Accounts Department located in the
Maharashtra and Goa states. In some specialized courses like Environmental Auditing,
Corporate Finance, Corporate Governance, Audit of Municipal Corporations, Development
of Management Skills etc., participants are nominated countrywide. Moreover, on need basis,
we meet the training requirements of Auditee organizations such as MSETC, MHADA. The
RTI functions on an advice rendered by the Regional Advisory Committee (RAC) notified by
the Comptroller and Auditor General of India. The RAC represents 15 user offices & is
headed by senior most D. G. level officer. The training need analysis is done in each user
office to ascertain the training requirement. The Annual Training Calendar is finalized after
receiving the training requirements from user offices in RAC meeting after detailed
discussion. This institute is headed by a Principal Director (Sr. Administrative Grade) who is
assisted by a team of Core Faculty and supporting staffs.

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 Preface

Audit officers of the Comptroller & Auditor General (C & AG) of India regularly undertake
audit of Corporate Governance practices of Public Sector Enterprises (PSEs) in India. The
purpose of this publication on the subject of Audit of Corporate Governance is to provide a
comprehensive technical reference point to the audit officers of the C & AG. This publication
shall serve the academic and audit execution interests of the audit officers by providing them
detailed audit guidance while they cover the area of Corporate Governance in auditing public
sector enterprises.

RTI has developed this publication with the professional assistance of Verita Management
Advisors Pvt. Ltd. Verita specialises in the areas of Governance, Risk and Compliances,
Direct and Indirect Taxation and process outsourcing. In particular RTI acknowledges the
exemplary efforts of Mr. Huzeifa Unwala, Board Member, Verita Management Advisors Pvt.
Ltd for his contributions in this publication.

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Foreword

5
Expert Point of View

Game changers for effective Governance in PSUs

Given that the PSUs of our country are today poised to release huge shareholder value if they
are well Governed, the initiative to audit Governance practices is both timely, and extremely
valuable. The correlation between excellent Governance and value in the market place has
never been stronger. The time to reach the zenith of great Governance is “now”.
The most important aspect to get right is to create the right Board structure. The upper limit
of Board size may be set at 10 with at least 50% independent members. The attributes that
every independent director should possess are integrity, competence and commitment. The
diversity on the Board can come from a unique set of experiences, a geographic spread and at
least two women. The tenure of each independent director should be a fixed five years.
Every year a careful evaluation of presence, contribution and leadership should be
documented and renewal for a further term of 5 years must be predicated on a high Evelyn of
documented performance. The appointment must be made by a Nomination and remuneration
committee and compensation must be set at reasonable levels per meeting of Board or time
demanding committee and a commission based on profits and evaluated performance. Unless
Board compensation is on par with Corporate India's best practices, the ability to attract and
retain the right talent will be severely constrained. The specious argument of reputation effect
of serving on a PSU board must be buried. The strictest norms of independence can be
enforced and any attempt to gain undue influence over contracts or appointments must be put
down with severity only thus will a great base of directors will evolve. An inspirational prize
for the best PSU director may be established independently.
Three committees are crucial, the Audit and compliance committee, the Nomination and
remuneration committee, and the stakeholder relationship committee. The remit of these
committees can be drawn completely from the Companies Act and the regulations made.
Each committee, at its first meeting must eyeball the remit and add to it based on the
individual setting of each PSU. The committee chairperson should be elected by the
committee itself and there should be a majority of independent directors on each committee.
Fixed tenures, rotation and refreshment must be built into the DNA of each committee. The
objective must be to make every meeting feel better than the previous one. Mandatory self
evaluation to be documented by the Company Secretary after every meeting will drive this
framework of continuous improvement. Once initiated the positive benefits of these practices
are incalculable.

AUDIT COMMITTEE

With the constitution and DNA as articulated in the previous, section the Committee would
be set to attain world beating benchmarks. The committee must set out the desired AUDIT
and COSTING practices through extensive interaction with the concerned Auditors. The
chief of these functions must always have a direct reporting relationship to the Committee
and its Chairperson. Only then will independence and courage emerge. The protection of
whistle blowers and the thorough investigation of frauds must be a part of the remit. The
appointment of the Chiefs, their increments based on objectively evaluated performance and
the exit interviews must be part the remit. Internal Audit must follow the business model.

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Reporting must be in the context of trend in performance, comparison with budgets and with
Global best practices. Audit must report on whether world class policy and systems and
process driven frameworks have been established. Compliance, ethical conduct and conflict
free actions are non negotiable requirements for any PSU. These must be emphasised along
with an accent on physical and externally objective appraisals of assets. The auditors both
internal and statutory must have free access and a chance to have in camera meetings with the
committee. Also implementing executives must remain present when their functions are
being discussed. A tracker by person and by time must be established and inputs to the
Knowledge management system must emerge from every Audit Committee.

STAKEHOLDER RELATIONSHIP COMMITTEE

This committee must mandate the establishment of a one on one relationship with every
shareholder. Every share must be dematerialised. Every address and every nomination must
be up to date. Any comments on non or late receipt of annual reports and dividends must be
seriously investigated. The target for the Secretarial department must be to have a complaint
free relationship with every shareholder. Only when this aspect is given serious and
continuous attention will outcomes be as desired.

NOMINATION AND REMUNERATION COMMITTEE

Selection of the CEO and fresh Board members must be the remit of this committee.
Objective evaluation, fair treatment and protection against external defamation or frivolous
litigation must also be established by this committee. As this is a crucial committee which
must have an external and internal face, the Board Chairman's presence on the committee is
valuable. Self appraisal and appraisal of the Board and a fair communication of feedback are
all remits. The quality of this committee will determine the ultimate efficacy of the Board.
In addition to these committees, whose outputs and decisions must be summarised for the
Board, other sub committees may be established for special purposes. Large Capex projects,
significant acquisitions and divestments and other non- recurring but intensely time
consuming tasks are often handed over towelling constituted sub committees. The Board
chairperson must constitute and appraise all such committees. They must not be allowed to
linger once their task is accomplished.
If a PSU board is supported by effectively functioning committees as outlined above, it can
dedicate a majority of its time to strategic discussions which can change the destiny of the
enterprise. It is not unusual for Boards which are well organised to challenge proposals which
may appear good to go. Changes from brown field to Greenfield Capex allocations, the
rejection of seemingly attractive corporate actions or the choice of policies in the light of
emerging challenges are examples of what a good Board may achieve as outcomes. The
challenge is to set an appropriate agenda, to encourage participation in a open manner and to
respect views as well as consensus or majority outcomes.
If these practices can be targeted upward o City, State, National and International
Governance, we can look forward to a future which will seem guided by the will of the
people. Good Governance is Good trusteeship in essence.
- By Shailesh Haribhakti, Chartered Accountant.

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Overview

According to the International Finance Corporation (IFC World Bank Group) Corporate
governance refers to the structures and processes for the direction and control of companies.
Corporate governance concerns the relationships among the management, Board of Directors,
controlling shareholders, minority shareholders and other stakeholders. Good corporate
governance helps companies operate more efficiently, improve access to capital, mitigate risk
and safeguard against mismanagement. It makes companies more accountable and
transparent to investors and gives them the tools to respond to legitimate stakeholder
concerns such as sustainable environmental and social development. Corporate governance
also contributes to development. Increased access to capital encourages new investments,
boosts economic growth, and provides employment opportunities.
Corporate Governance (CG) is defined as the system by which companies are directed and
controlled. Sound corporate governance is an important element of sustainable public and
private sector development. CG strengthens businesses’ ability to attract investment and
grow, because it makes them, stronger, more efficient, and more accountable.
The OECD Principles of Corporate Governance provide the framework for identifying the
rights and equitable treatment of shareholders and other financial stakeholders, the role of
non-financial stakeholders, disclosure and transparency, and the responsibilities of the Board
of Directors. The OECD Principles are universally applicable to all types of corporate
governance systems in countries at all levels of economic development.

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Corporate Governance Emerging Regulatory Landscape

The mandatory and non-mandatory corporate governance related regulatory requirements in

India have significantly evolved over a period of last decade or so. As the Indian economy
integrates with the globe and Indian businesses transition to the next cluster unique risks/
threats emerge which require sharp regulatory responses and enforcements. Existing
provisions under the listing agreement popularly known as the Clause 49 requirements have
been overhauled by the Companies Act 2013 and recent recommendations of SEBI have
aligned India’s corporate governance regime with the developed countries.
The SEBI may need to amend the current listing agreement to bring it in line with the Companies Act,
2013. Key recent regulatory amendments enacted under the Companies Act, 2013 that would
have a far reaching impact on Corporate Governance Systems and Practices in India are
highlighted in segments hereunder:

S. No. New provisions Likely impact

1. In prescribed class of companies there should be at least one
woman director.
2. Each company will need to have minimum one director who
stayed in India for at least 182days in the previous calendar
year.
3. Every listed company shall have at least 1/3rd of the total
number of directors as independent directors
4. Limiting the liabilities of Independent/ Non-Executive
Directors (NED)
5. Setting up of Vigil mechanism in prescribed manner by listed
and other prescribed class of companies
6. Every company which consists of more than 1000
shareholders/ debenture holders/ deposit holders or any other
security holders at any time during the financial year shall
constitute a “Stakeholders Relationship Committee” which
should be chaired by a NED.
7. No compromise or merger arrangement to be sanctioned by
the Tribunal unless the Company’s auditor has issued a
Certificate on accounting treatment.
8. Class Action Suits can be initiated by specified number of
members/ depositors except in case of a Banking Company
9. Service of documents, maintenance of accounting and
secretarial records in electronic form
10. Annual returns to carry information only relevant to the
Financial Year
11. “Fraud” is defined in relation to affairs of a company or
anybody corporate, includes any act, omission, concealment
of any fact or abuse of position committed by any person with
the connivance in any manner, with intent to deceive, to gain
undue advantage from, or to injure the interests of, the
company or its shareholders or its creditors or any other
person, whether or not there is any wrongful gain or loss.
12. Auditor to report to the Central Government any offence
involving fraud.
13. Class of companies qualifying the eligibility criteria to spend
This is an acknowledged best practice
and shall provide much needed diversity
to the Board composition in addition to
empowering women.
This shall ensure that companies cannot
be formed with all non-resident directors
This is an acknowledged best practice
and shall provide much needed diversity
to the Board composition.
This shall protect Independent/ Non-
Executive Directors
This shall strengthen surveillance
mechanisms
This shall act as a safety net to protect
stakeholder interest and is an
acknowledged best practice.
This shall act as a safety net to protect
stakeholder interest and also improve
financial disclosures.
This shall act as a safety net to protect
stakeholder interest, improve
transparency and ensure participation of
minority in key decisions.
Better efficiency and improved
transparency/ disclosures
Stress on relevant disclosures only
Clarity on the remit of Corporate Fraud
to ensure less legal controversies and
enforcement of punitive actions.
Auditor to act as whistle blower in
addition to auditing responsibilities
Uplift societal interests, Corporates

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 2% of average net profits in every financial year on prescribed expected to partner with Government in
CSR activities such as poverty alleviation, education, etc bringing a social transformation in the
country.
14. Listed companies will be given an option to have one director This shall act as a safety net to protect
elected by the small shareholders. stakeholder interest, improve
transparency and ensure participation of
minority in key decisions.
15. A person will be able to hold directorship in 20 companies, of To ensure quality time and attention is
which not more than 10 companies can be public companies. given by the Directors to the affairs of
the company
16. The maximum number of directors has been set at 15 and the To ensure quality time and attention is
same will be applicable to all companies. For any further given by the Directors to the affairs of
increase in number of directors, the company will need to pass the company
a special resolution at its General Meeting.
17. Every listed company will have at least one-third of total This is an acknowledged best practice
number of directors as independent directors, with any and shall provide much needed
fraction to be rounded off as one. In case of any change in the independence and diversity to the Board
circumstances which may affect his status as an independent composition and protection of minority
director, the independent director will have to give a interests.
declaration that he meets the criteria of independence. The
independent director may be selected from a data bank
maintained by anybody, institute or association, as may be
notified by the Central Government. An independent director
will not be entitled to any stock options in the company.
18. Detailed “Code for independent directors” containing detailed Clarity on the role and responsibilities of
guidelines for professional conduct, roles and responsibilities. the independent directors.
19. National Financial Reporting Authority (NFRA) to be Independent check on the activities of
established to oversee formulation of accounting and auditing professional accounting bodies, standard
standards and monitor audit firms. setting bodies and audit firms.
20. Provisions for mandatory rotation of auditors, restrictions on Improved corporate control environment
provision of conflicting professional services and governance practices.
21. A company cannot make investment through more than two Improved disclosures and reducing the
layers of investment companies, with exceptions. likely hood of related party transactions.
22. A related-party transaction can be entered into only if it is Improved disclosures and arm’s length
approved by a resolution at the general meeting. pricing of transactions/ business deals.
23. A company having one or more subsidiaries shall prepare Improved disclosures and informed
Consolidated Financial Statement, in addition to financial investment decision making.
statements, which shall also be laid before the annual general
meeting of the company.
24. The Directors’ Responsibility Statement disclosures have Improved corporate control
been enhanced to include- (a) in the preparation of the annual environment, disclosure and governance
accounts, the applicable accounting standards had been practices.
followed along with proper explanation relating to material
departures; (b) the directors had selected such accounting
policies and applied them consistently and made judgments
and estimates that are reasonable and prudent so as to give a
true and fair view of the state of affairs of the company at the
end of the financial year and of the profit and loss of the
company for that period; (c) the directors had taken proper
and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this
Act for safeguarding the assets of the company and for
preventing and detecting fraud and other irregularities; (d) the
directors had prepared the annual accounts on a going concern
basis; and (e) the directors, in the case of a listed company,
had laid down internal financial controls to be followed by the
company and that such internal financial controls are adequate
and were operating effectively.

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Perception of Corporate Governance in the public sector

While listed PSUs are required to comply with Clause 49 of the SEBI Listing Agreement, it
is now mandatory for all Central Public Sector Enterprises (CPSEs) to comply with the
corporate governance norms rolled out by the Department of Public Enterprises. The general
view is that from a regulatory perspective, PSUs are not lagging behind.

The non-executive directors on the PSU boards have been making a significant contribution
in improving the overall functioning of PSUs through their insights and external perspectives

When it comes to corporate governance, it is also an issue of perception. The private sector
has definitely scored in perception management – i.e., in projecting the corporate governance
practices they have voluntarily adopted in their quest for improved transparency and
accountability. PSUs and especially those that are unlisted should be transparently disclosing
their corporate governance practices which have hitherto not been the case.

Audit of Corporate Governance practices shall enable PSUs in implementing best in class
corporate governance practices leading the way rather than following the private sector.

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Challenges of Corporate Governance in India

Corporate governance practices in India are still evolving. It is a process of engaging

shareholders and the management effectively to enhance the organization’s value. It involves
participation of various stakeholders and management, communication, exchanging and
validating ideas, and consultations. Hence, corporate governance is essentially a function of
the mindset and culture prevalent in the organization’s operating environment. Corporate
governance cannot be looked at in isolation; it is heavily influenced by the overall
governance eco-system. Recent scandals in corporate India have raised questions not only
about the practices adopted by companies to solicit business but also about the standards of
accountability in public administration including within the government machinery and
institutions. The larger governance issues external to the enterprise will need to be addressed
along side governance issues within the enterprise. Corporate governance in India faces its
own set of challenges which are set out below
There is a gap between corporate governance standards in the public sector and the private
sector. PSUs are subjected to varying levels of government interference in their routine
functioning, undermining their autonomy. Further, restrictive and outdated labour laws in
India make laying off employees and closing businesses difficult. Many PSUs which ceased
operations decades ago still own and maintain obsolete properties and machinery and pay
their staff while the government debates their future. In FY2011, about a third of India’s 249
state owned companies collectively lost $3.4 bn.
There is substantial room for improvement in enhancing accountability. Within many board
rooms in India, the topic of CEO succession is not often discussed. CEO succession planning
calls for wider debate and rigorous processes than the ones currently followed, especially in
owner-managed businesses. Also, boards need to be held more accountable for their decisions
and actions.
Although India has numerous regulations, their enforcement is quite weak. Numerous
government departments, multiple layers of bureaucracy and complex power sharing
equations among them stifle stringent enforcement of regulations. Private enforcement i.e.
enforcement by shareholders and market intermediaries is weak too.
There needs to be an objective debate in corporate India about what is required to be done to
make Independent directors more effective. In the past, there has been a tendency to blame
independent directors for governance issues. It is important to address the challenges such as
true independence, developing the institution and pool of personnel with diverse skill sets
who can provide exemplary board service and improve corporate functioning and taking
concrete measures to improve their functioning through a combination of orientation,
training, clear roles and adequate remuneration.
The post financial crisis era has witnessed a marked rise in investor activism. This is
particularly true of institutional investors who have longer term interest in a company and
have a greater say in its functioning. However, investor activism in India is relatively muted.
As experience has shown, greater investor scrutiny could bring about substantial
improvement in corporate governance. This is an important area where India needs to catch
up with the developed world fast.

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The regulation and scrutiny of the audit profession in India could benefit from some objective
introspection.
It is expected that the Companies Act 2013 and the rules framed there under shall provide
clarity on enhanced corporate governance practices and align Indian governance regime with
that of the developed nations.

Why Corporate Governance matters?

1. In emerging markets like India the subject of CG is widely discussed and chronicled
among policymakers, academicians and auditors as corporate governance plays a vital
role in improving access to capital for emerging market companies. An increasing volume
of empirical evidence indicates that well-governed companies receive higher market
valuations. Improving corporate governance will also increase all other capital flows to
companies in developing countries: from domestic and global capital; equity and debt;
and from public securities markets and private capital sources.

2. Improving performance. Equally important and, irrespective of the need to access capital,
good corporate governance brings better performance for companies. Improved
governance structures and processes help ensure quality decision-making, encourage
effective succession planning for senior management and enhance the sustainability of
companies and lesser corporate scams.

3. Unlocking the wealth generation abilities of PSUs in India

4. Protection of shareowners and minority interests.
5. Balancing of social interests, financial stability and sustainability of corporates.
6. Much improved investor confidence and market sentiment, greater ability of corporates to
attract and retain talent, etc.

What comprises of a company’s Corporate Governance System?

Corporate governance issues arise from the roles of agency and stewardship. Agency
involves the transfer of capital from the shareowners to the control of managers. Stewardship
refers to the directors’ role as guardians of the company’s assets. The shareowners, through
the board, delegate authority to management and entrust the board to act on their behalf.
These roles are important when a company’s owners (e.g., the shareowners) are different
from its managers. This separation of the ownership and control functions within a company
inevitably leads to the managers being made responsible for the spending of other people’s
money.

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1 Laws that govern the 2 Corporate Governance 3 Constitutional framework of
company codes, Listing agreements, the company including articles of
Business responsibility association, shareholders
reporting agreement,

4 Board of Directors who act 5 Company Policies & 6 Culture of the company.
as the conduit between the Procedures. The code of
shareowners and managers of ethics/ conduct
the company

Why we need to audit Corporate Governance system?

Corporate governance is a strategic activity that ensures that all processes that are necessary
for directing and controlling a business enterprise are implemented effectively. Audit of
corporate governance processes provides assurance to the various stakeholders that all the
required governance activities have been accomplished and what remains otherwise thereby
assisting stakeholders in making an informed decision. Stakeholders don’t like to receive
surprises and audit of corporate governance activities shall ensure and effective check
mechanism on the supervisory and managerial layers of a business enterprise.

Scope of Audit of Corporate Governance activities (CGA)

The gamut of CGA is wide and generally boundary less, as the subject covers:

1. Financial and non-financial stakeholders

2. Boards of Directors (Composition, mix, independence);
3. Control Environment (Accounting, Controls, Internal and External Audit); and
4. Risk Management
5. Transparency and Disclosure.

At the same time, it does not include, although it may reinforce, the following:

2. Corporate Social Responsibility / Corporate Citizenship;

3. Socially Responsible Investing;
4. Other Elements of Sustainability;
5. Political Governance;
6. Business Ethics;
7. Anti-Corruption / Anti-Money Laundering.

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General approach for audit of CGA

1. The auditor is expected to familiarize him/herself with the business, sector,

competition and annual disclosures of the auditee. The auditor should conduct a
detailed research on the corporate governance practices of the company pre-appraisal.

2. Understand the elements of the Corporate Governance Program, applicable laws and
regulations. Build a relationship with the officer or director of the Company charged
with overseeing development of, and compliance with the Company’s governance
policies and.

3. Make periodic contact with members of the board of directors of the Company and
inquire about the functioning of the board and whether the directors believe the board
is effectively carrying out its roles to add value to management and protect
shareholders and other stakeholder interests.

4. Keep abreast of developing corporate governance standards in the relevant market and
internationally. Encourage the Company to take these into consideration and adopt
them appropriately to the Company’s particular circumstances.

5. Be on the lookout for corporate governance challenges (conflicts cases, Chairman/

MD/ CEO succession, special accounting issues, increasing complexity of the
business), and think about additional assistance the Company may need to adjust its
governance practices to meet such challenges.

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Audit of Corporate Governance System

Accountability
1. Check there is separation of ownership and control.
2. Check whether executive management is accountable to Board
3. Check whether Board is accountable to shareowners
4. Check whether there is a Board Charter
5. Check whether the independent directors have powers to play their role effectively
6. Check whether the auditors of the company have full access to information and
authority to present their view points at Board meetings
7. Check whether the company has policies on ethical marketing practices, bribery and
dishonesty, employee and customer privacy, fair employment practices, gifts,
entertainment, related party transactions and conflict of interests
Fairness
1. Check whether all shareowners, including minorities are treated equitably
2. Check whether there are defined procedure for effective resolutions of violations
3. Check whether the company has pricing policy and fair market practice code
Transparency
1. Investors should be able to obtain information about the rights attached to all series and
classes of shares before they purchase. Any changes in voting rights should be subject to
approval by those classes of shares which are negatively affected.
1. Check whether there is a timely, accurate disclosure on all material matters, including:
financial and non-financial information, performance, ownership, frauds, going concern
crisis and governance
2. Check whether the company has a policy for making political contributions
3. Check whether the company has comprehensive insider trading disclosure and
compliance practices
4. Check whether shareholders should be able to make their views known on the
remuneration policy for board members and key executives. The equity component of
compensation schemes for board members and employees should be subject to
shareholder approval.
5. Institutional investors acting in a fiduciary capacity should disclose how they
manage material conflicts of interest that may affect the exercise of key ownership
rights regarding their investments.
Responsibility
1. Check whether there is recognition of stakeholders rights, social responsibility and
business sustainability requirements
2. Check whether the Board’s responsibility includes review and guiding of corporate
strategy, major plans of action, risk policy, annual budgets and business plans; setting
performance objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and divestitures.
Shareholder Interests
1. Check whether shareholders should have the right to participate in, and to be sufficiently
informed on, decisions concerning fundamental corporate changes such as: 1)
amendments to the statutes, or articles of incorporation or similar governing documents

16
 of the company; 2) the authorisation of additional shares; and 3) extraordinary
transactions, including the transfer of all or substantially all assets, that in effect result in
the sale of the company.
2. Check whether capital structures and arrangements that enable certain shareholders to
obtain a degree of control disproportionate to their equity ownership should be
disclosed.
3. There exists rules and procedures governing the acquisition of corporate control in the
capital markets, and extraordinary transactions such as mergers, and sales of substantial
portions of corporate assets, should be clearly articulated and disclosed so that investors
understand their rights and recourse. Transactions should occur at transparent prices and
under fair conditions that protect the rights of all shareholders according to their class.
4. The exercise of ownership rights by all shareholders, including institutional investors,
should be facilitated.
5. Minority shareholders should be protected from abusive actions by, or in the interest of,
controlling shareholders acting either directly or indirectly, and should have effective
means of redress.
6. Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest in
any transaction or matter directly affecting the corporation.

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Checklist

Background
Audit officers of the Comptroller & Auditor General (C & AG) of India regularly undertake
audit of Corporate Governance practices of Public Sector Enterprises (PSEs) in India. The
purpose of this section is to provide a comprehensive checklist reference point to the audit
officers of the C & AG. Theensuing audit checklist shall serve the academic and audit
execution interests of the audit officers by providing them detailed guidance while they audit
the Corporate Governance systems and related controls in Public Sector Units (PSUs).

Pre-Audit Commencement
Prior to audit commencement it would be appropriate that the audit officer develops a sound
understanding of the business and risk environment, management and governance practices
of the PSU. Aninformation questionnaire should be circulated to collect specific information
and records that would be relevant in the audit of Corporate Governance practices of the
PSU. Prior to the field work it is advisable to obtain following information:

1. A complete set of most recent documents like the corporate policies, delegation of
powers, operating procedures, annual reports including directors reports, audit reports,
secretarial audit reports, minutes of Board/ Audit Committee/ Other committees

2. List of associated enterprises, related parties, director and employee annual

disclosures on income/ conflict of interest/other relevant aspects impacting
governance

3. In case of Public listed entities discussion with the statutory auditors on the corporate
governance certification report and major concerns (if any)

4. Status of investor complaints received by the PSU, published reports (negative) from
credit rating agencies/ equity research agencies/ media on governance practices of the
PSU

Basis study of the above information the audit officer should decide the audit coverage and
extent of substantive verification.

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Audit Checklist
This section lays down detailed checkpoints arranged sequentially on all significant aspects to
be considered while undertaking audit of Corporate Governance practices of the PSUs.

Compliance Area Auditor Remarks/

Observations
[Part A – Leadership, Corporate Citizenship]

1. Whether the company has designed and implemented a

code of ethical business conduct?

2. Whether the company has designed and implemented

policies and strategies in relation to economic, social and
environmental impacts?

3. Whether the directors have provided an ethics performance

statement in the annual report of the company?

4. Whether the company has prepared an ethics risk profile?

5. Whether the company has communicated the ethics policy/

Code of conduct (CoC) on its website?

6. Whether all employees have been trained on the ethics/

CoC?

7. Whether the Board has reviewed the performance and

effectiveness of the implementation of the company’s CoC?

8. Whether the company has established a suitable employee

conduct monitoring mechanism?

9. Whether the company has obtained annual declarations

from the Board and Key Managerial Personnel (KMP) of
their compliance with the CoC?

10. All Board members and senior management personnel shall

affirm compliance with the CoC on an annual basis. Whether
the Annual Report of the company contains a declaration to
this effect signed by the CEO?

11. Whether the company contributes has designed and

implemented a CSR policy?

12. Whether the company has a dedicated Board Committee for

undertaking formulation and review of CSR activities?

13. Whether the company has earmarked prescribed profit

contributions towards annual CSR activities such as poverty
alleviation, education, etc?

14. All Board members and senior management personnel shall

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 affirm compliance with the CSR policy on an annual basis.
Whether the Annual Report of the company contains a
declaration to this effect signed by the CEO? Whether
reasons for non-compliance with the CSR policy have been
disclosed in the annual report of the company?
Compliance Area Summary Opinion of Auditor

[Part A – Leadership, [Descriptive narration of areas of improvement]

Corporate Citizenship]

Overall Audit Rating:

 Excellent (Level 5)
 Good (Level 4)
 Satisfactory (Level 3)
 Poor (Level 2)
 Unacceptable (Level 1)

20
Compliance Area Auditor Remarks/
Observations
[Part B – Board of Directors& Board Committees]

1. Whether members of the Board meet the competency and

appointment criteria set by the Government, Companies Act
and governing rules of the PSU/ company?

2. Whether the ‘chairman’ and ‘managing director’/CEO

function is separated?

3. Whether there is a clear bifurcation of responsibility between

a chairman and a CEO?

4. Are the independent directors at least one-third of total

number of directors?

5. Whether the Board of Directors has a code, charter,

responsibility and accountability statement?

6. Whether there is transparent and effective communication

with stakeholders on both positive and negative aspects of
the business?

7. Whether there is a stakeholder engagement policy to

determine positive and negative news about the company
on a timely basis?

8. Whether the Board of Directors have reviewed the annual

and quarterly operating performance of the company?
Whether the Board of Directors have prepared and made
periodical/ annual disclosuresas required by the Board
especially the annual report disclosures?

9. Whether the company has designed and implemented an

internal control system for control over financial reporting?
Does the system function effectively? Is the Audit
Committee and the Board satisfied with the internal financial
controls?

10. Whether the performance of the board and individual

directors is assessed annually and disclosure regarding the
same is made in the annual report?

11. Whether the Board has identified Directors who are

responsible for reviewing the performance and financial
affairs of the step down subsidiaries, associated companies
and joint ventures/ public private partnership projects?

12. Whether identified Directors who are deputed to review the

affairs of the subsidiary companies submitted their annual
assessments to the main Board for consideration, decision
making and public disclosures?

13. Whether the Board has constituted all the mandatory and
non-mandatory Board Committees to deal with various

21
 aspects of Board matters?

14. Whether the Board/ Audit Committee has reviewed and

monitored the auditor’s independence and performance, and
Effectiveness of audit process?

15. Whether the Board has disclosed a statement indicating

development and implementation of a risk management
policy for the company including identification therein of
elements of risk, if any which in the opinion of the Board may
threaten the existence of the company?

16. Over the last 12 months, did the Board and Audit Committee
meet at least 4 times without exceeding the time gap of three
months between two meetings?

17. Does the Number of independent directors on the Audit

Committee comply with the statutory requirement?

18. Whether the Chairman of the Audit Committee is an

independent director?

19. Does the audit committee have clear and written terms of
reference? Are the terms of reference reviewed periodically?
If yes, how often?

20. Whether members of the Audit Committee are financially

literate and have the ability to read and understand the
financial statements?

21. Do all members of the Audit Committee have knowledge of

financial matters of the company and at least one member
has expertise in accounting and financial management?

22. Do the procedures governing the Audit Committee specify

that the Audit Committee is responsible for reviewing with
the management the performance of statutory and internal
auditors-and adequacy of the financial disclosures and
internal control systems?

23. Has the Audit Committee reviewed the adequacy of the

internal audit function of the company during the year?

24. The Board/ Audit Committee to review the functioning of the

Whistle Blower mechanism, whether this has been
accomplished?

25. Whether related party transactions are periodically placed in

the audit committee?

26. Whether the Board/ Audit Committee has reviewed the

integrated risk management policy and risk mitigating action
plans?

27. Whether the Board/ Audit Committee has reviewed the

impact of continuing internal control deficiencies? Whether
there are any significant deficiencies or financial/ non-

22
 financial irregularities/ frauds that have an impact on the
financial statements of the company?

28. Whether all material transactions with related parties not

forming a normal course of business are placed before the
audit committee?

29. Whether all material details of transaction with related

parties or other which are not an arm’s length basis along
with justifications placed before the audit committee?

30. Whether the executive team, key personnel and auditors

have made prescribed disclosures of the related party
transactions?

31. Whether the company trains its Board members in the

business model of the company as well as the risk profile of
the business parameters of the company, their
responsibilities as directors, and the best ways to discharge
them?

Compliance Area Summary Opinion of Auditor

[Part B – Board of Directors& [Descriptive narration of areas of improvement]

Board Committees]

Overall Audit Rating:

 Excellent (Level 5)
 Good (Level 4)
 Satisfactory (Level 3)
 Poor (Level 2)
 Unacceptable (Level 1)

23
Compliance Area Auditor Remarks/
Observations
[Part C – Disclosures & Transparency]

1. Whether the company has made comprehensive disclosures

about its code of conduct, recruitment, procurement/
tendering, customer charters and other important policy
disclosures on its website?

2. Whether there exist institutional mechanisms for disclosing

positive and negative information of the company to all
stakeholders on a timely basis?

3. Do the company’s accounting procedures comply with the

Accounting Standards adopted by National Financial
Reporting Authority/ICAI/ C & AG?

4. Is the deviation from the prescribed Accounting Standards

disclosed and explained in the financial statements and in
the corporate governance report of the company?

5. All disagreements on financial reporting between the

company/ Board and auditors have been appropriately
disclosed in the financial disclosures?

6. All material non-financial information and business segment

wise information has been disclosed?

7. Does a “Management Discussion and Analysis” form part of

the director’s report to the shareholders. ?

8. Whether segment-wise and product-wise performance

analysis is done and strengths and weaknesses identified
adequately?

9. Whether comparative study is made to measure financial

performance with respect to operational performance?

10. Whether all disclosures pertaining to personal interest

leading to potential conflict with the interest of company are
made?

11. Whether any significant threat to the “going concern” status

of the company/ PSU has been disclosed?

12. Whether all material liabilities/ legal disputes and contingent

liabilities have been appropriately disclosed?

13. Whether all concentration risks have been suitably

disclosed?

14. A half-yearly declaration of financial performance including

summary of the significant events in last six-months, may be
sent to each household of shareholders.

15. Does the company’s latest Annual Report have a separate

section on Compliance to Corporate Governance Guidelines

24
 issued by DPE?

16. Does the Annual Report disclose adequately noncompliance

of any mandatory requirements with reasons?

17. Does the-company produce periodic-reports-and-press

releases to indicate significant developments impaction-on
corporate governance (such as legal and-environmental
issues, commitment to workforce, suppliers, Customers And-
local communities etc.?

Compliance Area Summary Opinion of Auditor

[Part C – Disclosures & Transparency] [Descriptive narration of areas of improvement]

Overall Audit Rating:

 Excellent (Level 5)
 Good (Level 4)
 Satisfactory (Level 3)
 Poor (Level 2)
 Unacceptable (Level 1)

25
Compliance Area Auditor Remarks/
Observations
[Part D – Accountability]

1. Whether there are clearly defined job roles, duties,

responsibilities and a clear delegation of authority/ power
matrix?

2. Whether there is minimization of discretionary powers at

every level and if the discretionary power is revoked full
justification is noted?

3. Whether the human resources reporting system,

hierarchy system and line staff function are clearly
defined?

4. Whether there is performance appraisal mechanism to

measure the budgeted performance versus actual
performance?

5. Whether there is a well-defined succession policy for the

selection of senior level management personnel?

6. Whether there is any delay in finalization of financial

statements and if delayed who is accountable for it?

7. Whether there is a delay in finalization of accounts

leading to arrears of accounts and if so whether the
same is included in the Directors Report?

8. Whether the Board of Directors are made personally

liable for non-preparation of Annual Financial
Statements?

9. Whether any unviable projects are taken up without

proper feasibility and analysis?

10. Whether project appraisals are outsourced to third

parties and decisions are taken based on their
recommendations? Is there a situation where the project
fails, accountability is on the third party appraiser and
not of the management?

11. Whether there are instances where delegations of power

have been exceeded/ superseded?

12. Whether there are any instances of incorrect decisions

leading to financial losses and whether the persons were
accountable for the same?

13. Whether accountability is fixed for the directors who

have been appointed to attend Board meetings of Joint
venture partners in case of Public Private Partnership
projects?

14. Whether there are instances of post facto modifications

26
 of decisions impacting financial statements/ material
tenders and the reasons for the change in the decision
are recorded?

15. Whether there is a check on agreements with related

parties and whether there is adequate disclosure of
related party transactions?

16. Whether the recommendations given by audit committee

are implemented in time?

17. Whether there is a review by the Board of the

implementation effectiveness of the recommendations of
the Audit Committee/ Risk Management Committee/
other committees?

18. Whether the accountability is fixed and action taken for

non-achievement of targets/ budgeted performance?

19. Whether disciplinary cases are completed in time and

process is reviewed by the Board? Whether there is
clear identification of cases to be brought to Board for
approval?

20. Whether there is timely execution of projects including

payments to vendor/contractors and quick decision
making in project execution?

21. Whether procurement of good and service is at a

comparatively reasonable cost?

22. Whether there is transparency in the decision making

process?

23. Whether fraud and bribery risks are identified and there
are anit-bribery mechanisms in place to deal with
corruption and related practices?

24. Whether the top level posts like CMD, Chairman, and
Independent Directors are filled up on a timely basis?

25. Whether there is timely payment to the contractors or is

there any intentional delay in making payments?

26. Whether there is any undue influence from politically

exposed persons, members of legislature/ parliament or
local bodies?

27. Whether there is timely finalization of contracts?

28. Whether there is an independent review of high value

contracts by an independent agency with the
organization other than the people responsible for
finalizing the contract excluding internal auditors?

29. Whether Central/State Government enterprises have

given guarantee/counter guarantee for the finance raised
by private contractors or third parties?

27
 30. Whether the appointment, transfer, promotion of various
levels is done in more transparent and consistent way?

31. Whether there are any post bid advantages to the party?

32. Whether the absence of directors in important decision

making meetings is duly approved by the Chairman of
the meeting?

33. Whether there is delay in the tendering process with a

view to award the high value contract to a particular
party?

34. Whether any favor is made to the contractor by going in

for retendering without a valid justification?

35. Whether any contractual terms are overlooked to favor a

particular party to the contract?

36. Whether the pricing policy of any commodity is

comparable to the market price of similar commodity?

37. Whether the tender procedures for all high value

contracts are documented and publicized?

38. Whether the movable property and immovable property

returns of Key Management Personnel are
published/made available on website?

39. Whether the Board reviews that relatives/close family

members of Key Management Personnel/Board
Members are not associated with PSU’s activities?

Compliance Area Summary Opinion of Auditor

[Part D – Accountability] [Descriptive narration of areas of improvement]

Overall Audit Rating:

 Excellent (Level 5)
 Good (Level 4)
 Satisfactory (Level 3)
 Poor (Level 2)
 Unacceptable (Level 1)

28
Compliance Area Auditor Remarks/
Observations
[Part E – Others]

1. Does the Board of Subsidiary company include at least one

independent Director of the holding company as a director?

2. Verify if the Report of the Board of Directors of the holding

Company includes a statement to the effect that the
directors have reviewed the statement of all significant
transactions and arrangements entered into by the unlisted
subsidiary Company.

3. Whether statement of all significant transactions of

subsidiary company reviewed periodically?

4. Whether all policies, processes or procedures of holding

company adopted and implemented by subsidiary company
are approved and disclosed by the subsidiary company?

5. At least one independent director on the Board of Directors

of the holding company shall be a director on the Board of
Directors of a material non listed Indian subsidiary company.

6. The Audit Committee of the listed holding company shall

also review the financial statements, in particular, the
investments made by the unlisted subsidiary company.

7. The minutes of the Board meetings of the unlisted subsidiary

company shall be placed at the Board meeting of the listed
holding company. The management should periodically bring
to the attention of the Board of Directors of the listed holding
company, a statement of all significant transactions and
arrangements entered into by the unlisted subsidiary
company.

8. Does the company’slatest Annual Report disclose all

pecuniary relationship or transactions of the part-time
director’s vis-à-vis the company?

9. Whether the criteria of making payments to non-

executiveDirectors and convertible instruments held by them
are disclosed in its annual report?

10. Whether remuneration details of directors forms a part of the

section on the corporate governance of the Annual Report?

11. Does the company disclose in its latest Annual Report the
details on Remuneration of Directors?

12. Whether the remuneration is determined in accordance with

the policy put to shareholders?

13. Whether the remuneration of Directors and senior executives

is disclosed in the remuneration report?

29
 14. Whether the shareholders have approved the remuneration
policy in the AGM?

15. The company may establish a mechanism for employees to

report to the management concerns about unethical
behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy. This mechanism
could also provide for adequate safeguards against
victimization of employees who avail of the mechanism and
also provide for direct access to the Chairman of the Audit
committee in exceptional cases. Once established, the
existence of the mechanism may be appropriately
communicated within the organization.

16. Whether all conditions of corporate governance are complied

with?

17. Does the directors Report include compliance certificate

obtained from auditor or secretary?

Compliance Area Summary Opinion of Auditor

[Part E – Others] [Descriptive narration of areas of improvement]

Overall Audit Rating:

 Excellent (Level 5)
 Good (Level 4)
 Satisfactory (Level 3)
 Poor (Level 2)
 Unacceptable (Level 1)

30
Additional Information to be sought and commented upon:

A] The details of vacancies on the Board of Directors and their filling up during the year 2012-13 may
be furnished in the following format.

Sr. Name of the CPSE Name of the Date on which Date on which vacancy
No. Post vacancy occurred was filled up

B] The details of information to be furnished to the Board:

Sr. Details of information to be furnished to the Board Whether the

No. information has been
furnished to the Board
(Y/N)
1. Annual operating plans and budgets and any updates
2. Capital budgets and any updates
3. Quarterly results for the company and its operating divisions
or business segments
4. Minutes of meetings of audit committee and other committees
of the Board
5. The information on recruitment and remuneration of
Senior officers just below the board level, including
appointment or removal of Chief Financial Officer and the
Company Secretary.
6. Show cause, demand, prosecution notices and penalty
notices which are materially important.
7. Fatal or serious accidents, dangerous occurrences, any
material effluent or pollution problems.
8. Any material default in financial obligations to and by the
company, or substantial non-payment for goods sold by the
company
9. Any issue, which involves possible public or product liability
claims of substantial nature, including any judgment or order
which, may have passed strictures on the conduct of the
company or taken an adverse view regarding another
enterprise that can have negative implications on the
company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards
goodwill, brand equity or intellectual property.
12. Significant labour problems and their proposed solutions. Any
significant development in Human Resources/Industrial
relations front like signing of wage agreement, implementation
of Voluntary Retirement Scheme etc.
13. Sale of material nature of investments, subsidiaries, assets

31
 which is not in normal course of business.
14. Quarterly details of foreign exchange exposures and the steps
taken by management to limit the risks of adverse exchange
rate movement, if material.
15. Non-compliance of any regulatory, statutory nature or listing
requirements and shareholders service such as non-payment
of dividend, delay in share transfer etc.
16. Information to be mandatorily reviewed by the Audit
Committee:
- Management discussion and analysis of financial
condition and results of operations.
- Statement of significant related party transactions (as
defined by the audit committee), submitted by
management
- Management letters/letters of internal control
weaknesses issued by the statutory auditors
- Internal audit reports relating to internal control
weaknesses.
- The appointment, removal and terms of remuneration
of the Chief Internal Auditor shall be subject to review
by the Audit Committee.
17. Does the audit committee have clear and written terms of
reference?
18. Are the terms of reference reviewed periodically? If yes, how
often?
19. Have the members of the Audit Committee been issued
appointment.
20. Has an annual calendar of meetings of the Audit Committee
been prepared for the year 2012-13?
21. Has the Chairperson (Independent Director) of the Audit
Committee attended the AGM?
22. Has the Audit Committee conducted a meeting with the
Statutory Auditors without the presence of the Finance
Officers/Management of the company during 2012-13?
23. Has the Audit Committee held discussion with the Statutory
Auditor before commencement of the annual audit for the year
2012-13
24. Has the Audit Committee reviewed the adequacy of the
internal audit function of the company during the year 2012-
13?
25. Has the Audit Committee conducted any discussions with the
internal auditors during 2012-13
26. Does the company have a whistle blower mechanism? If yes,
has the audit committee reviewed the mechanism during
2012-13?
27. Does the company have anti-fraud and anti-corruption policies
and procedures? If yes, have they been reviewed by the Audit
Committee during 2012-13?
28. Has the Audit Committee reviewed the progress of expansion
projects of the company during 2012-13?
29. Has an annual report for the year 2012-13 on the working of
Audit Committee prepared.
30. Does the Audit Committee send regular reports to the Board
of Directors? If yes, in 2012-13 how many reports were sent
and when (indicate dates)
31. Have the Audit Committee members been provided training
on emerging changes during the year 2012-13? If no, has the
Audit Committee recommended any such training?

32
References

 OECD principles on Corporate Governance

 King 3 Code on Corporate Governance website
 Ministry of Corporate Affairs website
 SEBI website
 IFCI Washington website

Acknowledgement

The RTI and the knowledge partner Verita Management Advisors Pvt. Ltd warmly
acknowledges contributions from:
 Mr. Shailesh Haribhakti, Chartered Accountant
 Mr. Dhruv Shukla
 Ms. Vidisha Shah

33